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AIG Restructuring Continues with Japan Life Business Sale

Continuing its efforts to recalibrate its business to focus on core operations, AmericanInternational Group Inc. (AIG - Free Report) has entered into a strategic agreement with FWD Group, the insurance arm of Pacific Century Group.

Per the agreement, American International will sell its Japan life insurance business AIG Fuji Life Insurance Company, Ltd. (AFLI) to FWD Group.

The timing and the financial terms of the deal has been kept under wraps.

For AIG, Japan remains a major market and the company has been operating in this region for nearly 70 years now. Though this deal will lead the company to relinquish its life business, it is committed to continue with its extensive non-life insurance business in the region.

AIGhas been busy shedding assets and selling non core business in an effort to simplify its business by releasing tied up funds and focusing on core operations that have the potential to generate higher return on equity.

To this effect, AIGhas entered into a number of strategic deals recently. Last month, the company entered into strategic agreements with Fairfax Financial Holdings Limited to offload its commercial and consumer insurance operations in Argentina, Chile, Colombia, Uruguay, Venezuela and Turkey. It will also sell to Fairfax renewal rights for the portfolio of local business written by its Central and Eastern European (CEE) operations in Bulgaria, Czech Republic, Hungary, Poland, Romania, and Slovakia. Fairfax will also take over AIG’s CEE operating assets and employees.

In September, sources reported that Ascot Underwriting Holdings Ltd., the Lloyd’s of London insurer tied to American International Group Inc. will be bought by Canada Pension Plan Investment Board. The deal, valued at $1.1 billion, would fetch American International $240 million for its 20% share in business and ownership of a related unit in the deal.

AIG has undertaken other several divestures in a bid to make the company leaner.

AIG was a victim of the financial crisis in 2008 and was rescued by the government. It has generated more than $90 billion in funds by selling assets and businesses since then.

AIG’s restructuring initiatives gathered steam in recent months after its CEO, Peter Hancock was attacked by billionaire investor Carl Icahn last year November through a letter in which he created pressure on the former to slim down the massive company by dividing it into three parts – property and casualty, life and mortgage insurance. According to Icahn, these three businesses were so diverse that they together provided little or no synergistic effect. Also, the company’s mammoth size acted as a hindrance in its own path to progress as evident by its underperformance from the past several years.

Though AIG has taken numerous divestures since 2008, it could not generate the anticipated returns. The company has therefore taken a series of steps since Nov 2015, after Peter Hancock was threatened to be replaced from his job. In the beginning of 2016, the company announced that it will return $25 billion to its shareholders over two years. In view of this, in August, the company announced that it will sell its mortgage insurance unit United Guaranty Corporation to Arch Capital Group Ltd (ACGL - Free Report) or $3.4 billion. Also, in August, AIG completed the sale of its Taiwan unit. In May, the company completed the sale of Advisor Group to investment funds affiliated with Lightyear Capital LLC.

Other steps taken recently to drive up returns from AIG include the announcement made in August of a new share buyback plan to repurchase of additional shares with an aggregate purchase price of up to $3.0 billion. Prior to this, in Feb 2016, it authorized an additional $5 billion in share repurchases. The company also raised its quarterly dividend by 14% this year.

Moreover, the company formed a new Executive Leadership Team structure comprising 10 heads – all veterans in their respective fields – to work toward attaining the strategic priorities of the company. Several jobs were slashed, including those at senior positions in the company in order save cost.

Despite these numerous measures taken by AIG, it still has far to go to improve its profitability. We, however, believe the company is on the right track and is progressing well.

James River Group posted a positive surprise in three of the past four quarters with an average positive surprise of 3.60%.

Radian Group posted a positive surprise in two of the past four quarters with an average positive surprise of 5.9%.

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